Contents

ABS

Secondary Euro ABS lacks conviction

There has been a lull in the European secondary ABS market this week, as investor uncertainty continues to lurk within the sector. At the same time, primary new issuance continues to flourish with the pricing of two high profile deals today.

"The market has been softer in pricing over the last week and a little slower than normal," one ABS trader confirms. Although bid-lists are beginning to see a slight rise in volume, the trader explains that the sector currently lacks conviction.

He continues: "We have seen uncertainty in the broader market, so for us it's a case of waiting-and-seeing. This combined with the usual year-end lull, means that people are less likely to act."

Nevertheless, the last two months have seen senior tranches range down further in price, the trader notes, while mezzanine paper continues to reach strong levels.

Meanwhile, the primary market continues to boom with two new issues pricing today. First, the Italian RMBS Siena Mortgages 7 - the €595m A1 tranche priced at 115bp over Libor and the €300m A2 at 150bp over.

Although the A1 tranche performed well, the trader reveals that it did in fact fall short of expectation. "It all traded, but it wasn't wildly oversubscribed."

The second deal to complete today was Barclaycard's first credit card securitisation since the onset of the 2007 crisis, Gracechurch Card Programme Funding Series 2010-1. The trader explains that the US dollar denominated $500m tranche deal was targeting US investors. "The deal printed in line with price talk of 60bp over Libor, with a 2 year WAL," he confirms.

LB

ABS

A premature lull for Euro ABS

The European ABS market is creeping further into its end-of-year lull, prompted largely, traders say, by Ireland's crisis.

"It has been very quiet over the last week," one ABS trader confirms. This, he says, is due to the Irish sovereign crisis, which caused the market to "hold still" while awaiting possible EU/IMF intervention.

He continues: "There was a negative reaction before the EU/IMF package was announced. The market felt very weak; however, what emerged from the summit was encouraging for the ABS sector."

Nevertheless, the trader believes that the market is moving towards "year-end mode" at a much quicker pace than normal - causing investors to step back and discontinue their involvement completely. "Everyone's had a reasonable year this year, so they don't want to risk blowing half of their profits in the last six weeks of the year," he adds.

The trader confirms that his firm is fully invested in the majority of its funds, but due to the market's instability recently sold the more liquid bonds in its portfolio. He explains: "We felt that the market was weak in the past months; therefore, we sold the bonds to raise some cash and liquidity. But recently we decided to buy them back, though we didn't achieve any net gain. For us, it was about risk reduction and ensuring we have some firepower in our pockets if any high-yielding paper comes along."

Elsewhere in the secondary market, benchmark bonds failed to move. "Looking at Granite bonds, the triple-As in all three currencies are at or around the 93 level. We saw this as the most liquid bond in the market a few weeks ago, selling them at 93.1 and then buying them back at 93. They currently stand at 93-93.20."

The trader concludes that Granite paper staying at the same level for two weeks reflects market performance across the board. "The non-moving Granite performance says everything about the current market environment."

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CLOs

Euro CLO market fights back

The European CLO market has made an aggressive come-back this week. With Ireland's sovereign crisis addressed, the demand for mezzanine paper and bid-lists has exceeded expectation.

"The market is trading better by the bid-lists," one CLO trader remarks. Further, he notes that activity has continued to grow and flourish, thanks to the depth of the market. "The action has been at the lower end of the capital structure, where there's a real demand for equity and double-B paper."

Additionally, the trader confirms that the market has seen its highest bid in recent history - for over two years - with the Cordatus 2007 CLO. "Cordatus equity traded in the mid-60s - trading very well indeed and far exceeding our expectations," he says.

Overall, the CLO sector has experienced a boost in momentum over the past week. The trader explains that although the market paused briefly due to Ireland's sovereign crisis, investors were soon active once again. "People came back to the market soon enough, aggressively bidding."

Elsewhere in the market, the trader says that pricing levels have continued to rise. "We've started to see some of the really good single-As trading in the 70s - like Hyde Park for example. Single-As are five points stronger then what they were a few weeks ago too."

However, the main source of activity is the continuous flow of bid-lists, which currently dominate the CLO market. The trader continues: "We're expecting a small - six lines - of equity at 3pm tomorrow. The list includes Leopard V, as well as deals from the Alcentra and Sabadell programmes. The largest line is £6m, but the rest are likely to be approximately £2m. Generally, there's a good selection of top-tier managers on the list - it will be an interesting one."

The trader concludes that following tomorrow's forecasted activity, the week ahead will be fairly quiet due to US holidays. "After tomorrow's bid-list, we're looking at a quiet week ahead."

LB

CLOs

Investor caution amid new US CLO issuance

The US secondary CLO market has seen a dip in activity this week as bid-lists prove to be the only source of supply. The primary sector has, however, received a boost with the pricing of four deals.

"Bid-lists are the only form of supply in an otherwise supply starved market," one CLO trader says. "The pace of bid-lists has been inconsistent, however, due to a continued cautious approach among investors. People are still reaching for yields, which is due to investors testing the market and not achieving the required levels."

Although there are four bid-lists due for release in the US today (Friday), the supply side of the market has been thinner and much less robust, the trader notes - a trend that threatens to continue until the year-end. "There's new conservative money and total return money that has recently come into the market; aside from that, it will be very quiet due to the US holidays."

Looking at current market levels, the trader confirms that the capital structure is currently rallying from equity up to the mezzanine double-A tranches - and possibly even the triple-As, which have yielded from the high 200s to mid-400dm. However, he adds that triple-As have hovered at the same level without improvement over the last several months.

Further, double-As are yielding 5.5%-7%, while single-A tranches are ranging between 7%-9%. Triple-Bs are still in the low-teens, the trader notes, with double-Bs ranging between the mid- to upper-teens.

Meanwhile, new issues are boosting the market's confidence somewhat, although there are signs that investor caution has crossed over into this sector too. "People are being selective about the deals: there's concern that prices will dramatically drop in the next six to eight weeks," the trader adds.

He suggests that the US Federal Reserve's QE2 provided a momentary boost, proving that risk assets are very much in demand. Indeed, the CLO sector has seen four new issues priced over the last week - Apollo's deal via Citi, Guggenheim's via JPMorgan, LCM's via Bank of America and Oakhill's via Morgan Stanley (SCI passim).

"These deals are cleaner and have lower leverage than previously. Although investors are selectively picking them up, we are still lacking a vibrant new issue market - these deals are all we have," the trader says.

The new issues have nevertheless all received a good reception, he confirms. "The market can absorb these new issues and they're certainly useful to have, yet investors are still looking for secondary deals, which are much cheaper," he concludes.

LB

Insurance-linked securities

New Atlas cat bond markets

Aon Benfield is marketing the latest catastrophe bond from SCOR's Atlas programme. The €60m Euro windstorm and Japanese quake deal has been given a preliminary rating of single-B minus by S&P.

The second series form SCOR's Atlas VI catastrophe bond programme, the series 2010-1 class A notes will be exposed to Japanese earthquake and European windstorm risk (in selected countries and regions in north and west Europe) between December 2010 and April 2014. The deal will be the first catastrophe bond to use Risk Management Solutions' (RMS) parametric-based Paradex index to determine the losses following a Japanese earthquake, S&P notes.

"Paradex creates index values based on event parameters, such as the wind speeds during a windstorm or ground motion and shaking intensity during an earthquake, that are measured by a network of reporting stations," the rating agency explains.

These index values are used to estimate industry losses. As the event calculation agent, RMS will calculate an index value following a qualifying event. The index value for the European windstorm and the Japanese earthquake is the sum of the products of Paradex index values and payout factors for each CRESTA zone or city code respectively.

Atlas VI will cover losses in excess of an index value of 540 and below a value of 615, on an aggregate basis in each loss period. Qualifying events must reach an index value of at least 20 to contribute to the aggregate.

There are four risk periods for the transaction. The first is from the issuance date until 31 March 2011. The following three periods begin on 1 April 2011, 2012 and 2013 respectively.

The deal's collateral will be put into a tri-party repo structure with BNP Paribas as the counterparty and Euroclear as the tri-party agent.

MP

Ratings

African focus

Alfons Ideler, director and head of structured finance at Global Credit Ratings (GCR), answers SCI's questions

Q: How and when did GCR become involved in structured finance?
A: GCR first became active within structured finance over 10 years ago. We began by rating trade receivable transactions in South Africa.

Q: Which market constituent is your main client base?
A: GCR is a full service rating agency, which was established over 15 years ago with claims paying ability ratings and evolved over the years into corporate, government/municipalities, banking and structured finance. Our focus is emerging markets, in particular Africa.

Our head office is in Johannesburg, but we are active all across Africa, with offices in Nigeria, Zimbabwe and Kenya. GCR is actually the biggest rating agency in Africa, both in number of analysts on the ground as well as number of rated companies and transactions.

Q: Do you focus on a broad range of asset classes or only one?
A: We rate structured finance transactions across a wide variety of asset classes: trade receivables, structured preference shares, credit-linked notes, CDOs, RMBS, CMBS, residential leases, future flow, consumer loans, equipment leases, non-performing loans, structured funding vehicles and toll roads.

Q: What are your key areas of focus today?
A: We would like to expand the transactions we are involved in to a broader originator, arranger and investor base. Also we would like to rate more public transactions.

For example, in October we were the rating agency on the South African Fintech equipment lease securitisation (see SCI 28 October). We have two more public transactions in the pipeline for closing in 1Q11.

For structured finance, we are rolling out a set of published criteria that describe our rating approach to structured finance and relevant asset classes. This will make our approach transparent for all market participants, and it creates consistency over all transactions.

We started with the publication of a general report (Global Structured Finance Rating Criteria) and one in respect of consumer ABS (Global Consumer ABS Rating Criteria), and more will follow. The red line for all publications is to be transparent, consistent and to keep things short and focused on headlines instead of trying to describe every potential small aspect. This increases readability and understanding by market participants.

Q: How do you differentiate yourself from your competitors?
A: We are a local rating agency with the analytical team based in South Africa, having local knowledge. GCR's ratings are based on best international methodologies, suitably tailored to account for unique local market conditions. Together these benefits enable us to provide faster, better and cheaper service to issuers and the end-users of our ratings.

Q: Which challenges/opportunities does the current environment bring to your business and how do you intend to manage them?
A: Government will step up regulation and will dictate the requirements under which rating agencies should operate. Overseas regulators are currently very busy with this and the expectation is that South African regulators will follow suit. Accordingly, we are putting procedures in place to comply with any change in regulations.

I think, within emerging markets, there will be a clear shift from the three big international rating agencies to locally operated rating agencies. Market participants feel that the big three are neglecting emerging markets, with their focus being on their key markets (developed). To this extent, we have started a programme where we have intensified contact with all market participants to show that we have the skills, expertise and track record to meet their needs.

Q: What major development do you need/expect from the market in the future?
A: There is a great need for credit analysis, especially in Africa. In order to open up financial markets in Africa, ratings can be a very useful tool to get investors on board.

Not all investors have the time or resources to look at every single corporate name or transaction. A company like GCR is in an excellent position to take advantage of this. Our two largest institutional shareholders are the DEG and Proparco (two big European development finance institutions), which adds to credibility and provides access to their African network.

ABS

Recruiter adds structured credit exec

Robin Keck Associates has appointed Philippa Deane as a fixed income head-hunter. Before joining Robin Keck, Deane spent four years running her own executive search business. Prior to this, she was responsible for building and running a structured credit desk at International Search, after having spent five years at the structured finance search firm Mantaray.

ABS

Acquisition bolsters SME offering

Manx Financial Group has acquired the entire share capital of ECF Asset Finance, which provides asset-backed finance to UK-based SMEs. The acquisition has been made by Bradburn, a wholly owned subsidiary registered in Isle of Man.

ECF possesses the underwriting skills to help effectively manage risk at this key point in the economic cycle, according to Manx. The firm offers a diverse portfolio of finance products to UK-based companies, including sale and leaseback agreements, finance leases, hire purchase agreements and commercial loans.

Additionally, the Manx group has acquired ECF's current loan book with a healthy pipeline of committed proposals.

The consideration for the entire share capital of ECF was £1. Denham Eke, Manx Financial Group ceo, says: "The acquisition of ECF is a very positive move for both MFG and Conister Bank, as it will not only increase the value of our current loan book by over a quarter, but also will significantly increase interest income. The ECF team supplements our existing skills in sales, underwriting and collections, especially for commercial lending."

ABS

LatAm head recruited

Crédit Agricole has appointed Gordon Kingsley as head of Latin America debt and credit markets origination. Based in New York, he reports to Andy Schaeffer, head of credit markets and DCM origination Americas.

Kingsley was most recently md and head of structured finance at BCP Securities. Prior to this, he held senior capital markets positions at Forum Asset Management, Standard Bank, ING and JPMorgan, mostly focused on Latin America.

CDO

C-BASS bankruptcy 'complicates' CDO transfer

Credit-Based Asset Servicing and Securitization (C-BASS) is proposing to sell its CDO management portfolio to Fortress Investment Group affiliate FIG. However, Moody's suggests in its latest Weekly Credit Outlook publication that the C-BASS bankruptcy is a credit negative for the CDOs because it complicates the sale to a successor manager.

"Although the 17 CDOs managed by C-BASS are all inactive, meaning C-BASS no longer buys and sells assets for each CDO portfolio, these CDOs still need management," Moody's notes. "Despite their inactive status, they still require the disposal of defaulted assets, the supervision of collateral and other tasks. Inadequate or incompetent performance of these duties harms investors."

While the transfer of management from C-BASS to another manager might otherwise have been a credit neutral event, the bankruptcy proceedings add additional risk to the process because the bankruptcy court has the authority to turn down the proposed purchaser. Equally, if employees leave the firm over concern about its bankruptcy, the lack of personnel is likely to diminish the success of the transfer.

CDO

Bank sued over ABS CDO portfolio

National Australia Bank (NAB) has been served with a representative proceeding in the Supreme Court of Victoria, Australia. The claim relates to NAB's disclosure of provisions against its ABS CDO portfolio in 2008.

Maurice Blackburn Lawyers is representing a group of shareholders that acquired shares between 1 January 2008 and 24 July 2008. It is alleged that NAB failed to disclose material information associated with its exposure to ABS CDOs.

NAB says it will vigorously defend the claim.

CDO

Advisory head named

Western Asset Management has appointed Powell Thurston as head of advisory services. In this role, he will formalise Western's advisory business by providing customised solutions for fixed income instruments and derivatives.

Thurston joins the firm from PIMCO, where he most recently built its advisory business. Previously, he was responsible for building PIMCO's CDO and structured products business lines.

CDS

Bank adds in credit structuring

Jacques Barouhiel has joined Barclays Capital as a senior member of its credit structuring team. Based in New York, he will be responsible for the credit hybrid business and will report to Jaime Aldama, the firm's head of North American credit and ABS structuring.

CDS

Clearinghouse leadership team named

NYSE Euronext has announced the leadership team charged with launching its two purpose-built clearinghouses in London and Paris. The project is due to complete before the end of 2012.

Mark Ibbotson, formerly coo of NYSE Euronext's global derivatives segment, will lead the implementation team as evp of global clearing. He will report to Duncan Niederauer, the group ceo. Additionally, reporting to Ibbotson will be Declan Ward, executive director of NYSE Liffe clearing in London, and Michel Favreau, the firm's clearing project director in Paris.

Niederauer says: "Our new European clearinghouses will be central to our strategy of expanding our community, delivering value to customers and diversifying the business mix of NYSE Euronext. This initiative will substantially extend our post-trade capabilities and build on our existing London NYSE Liffe Clearing operations, as well as our launch of NYPC in the US early next year."

CDS

Acquisition strengthens alternatives platform

StormHarbour Partners has acquired London-based Fortrinn Partners, an investment manager that specialises in volatility trading strategies. Fortrinn was founded by Keith DeCarlucci and Antonis Giannopoulos, and will be renamed StormHarbour Alternative Investments (SHAI).

The firm currently manages the Fortrinn Convexity Fund, which it will continue to manage under the terms of the acquisition. DeCarlucci will also join the executive committee of SHAI - led by Thierry Sciard, managing principal of StormHarbour and SHAI ceo, and Nicolas Andine, principal of StormHarbour and SHAI cio.

CDS

Boutique bolsters Geneva office

StormHarbour Securities has appointed Alberto Ferro-Villani and Hugues Dauphin to its Geneva office. Ferro-Villani will be director of capital markets origination, while Hugues will be director of fixed income sales. The pair will report to Cyril Martinez, the firm's Geneva principal and general manager.

Ferro-Villani joins StormHarbour from Hepta Capital Partners, where he was md of its private equity fund, with particular focus on covering mid-size corporates. Dauphin was formerly executive director and head of structured credit distribution at Calyon.

CMBS

Real estate firm adds evp

Cole Real Estate Investments has appointed Mitchell Sabshon as evp and coo. Sabshon will be responsible for the firm's corporate finance activities and will work closely with president Marc Nemer on a broad range of initiatives relating to mergers and acquisitions, asset management and fund operations.

With 25 years of experience in the CRE and CMBS industries, Sabshon was previously at Goldman Sachs in a number of key strategic roles, including president and ceo of its commercial mortgage capital group.

CMBS

CRE broker recruited

Voit Real Estate Services has hired commercial real estate broker Darren Tappen.

For the past several years, Tappen has advised life insurance companies, banks, private equity and institutional investors through foreclosures, REOs, bank takeovers, FDIC loan pools and, most recently, CMBS workouts. He specialises in industrial, office and land acquisition, disposition and development in the Phoenix metropolitan area.

Prior to joining Voit, Tappen was with Cushman & Wakefield, where he was one of the founding members of the Cushman & Wakefield Resolution Group, which provides solutions and analysis for buyers and sellers of distressed assets. Before that, he was with Colliers International.

CMBS

CMBS origination function enhanced

Bridger Commercial Funding has added a mezzanine finance product to its CMBS origination programme. The capability is facilitated by a strategic relationship with New York Mortgage Trust.

Bridger will issue mezzanine loans of US$0.5m-US$5m, but only on transactions where it originates the senior CMBS loan. By leveraging the underwriting for the CMBS loan, the firm aims to provide a quicker, more efficient approval process and cost-effective all-in financing solution.

"The programme assists a growing number of property owners faced with unprecedented gaps between what they owe on existing mortgages and what the market will lend them today," says the firm's co-ceo Jim Fowler.

Some of the features in the programme include acquisitions and refinancing of loans, including cash-out refinance. Additionally, it will underwrite in compliance with CMBS standards and finance up to 85% collateral value available for multifamily properties, 80% for all other property types and a minimum of 10% remaining cash equity required for all mezzanine loans.

Distressed assets

Distressed investments firm adds md

Lee Landrum has joined Tennenbaum Capital Partners (TCP) as md. He was previously a principal with the global credit alternatives team at The Carlyle Group and an md with Babson Capital Management.

RMBS

Bank names MBS trading head

BNP Paribas has appointed Bogac Ozdemir as head of US long-term interest rate swap and agency MBS flow trading. Based in New York, he will report to the firm's head of US dollar rate trading, Laurent Dulout.

Before joining BNPP, Ozdemir was head of US dollar rates at Credit Agricole. Prior to this, he was at Citibank for 11 years, most recently as head of the US dollar swaps and agency MBS flow group.

ABCP

EMEA ABCP stabilising with room for growth

Moody's reports that the European ABCP market is likely to remain stable, with potential for growth through product innovations.

"Whilst we have not returned to the halcyon days before the credit crisis, the market has reached a new equilibrium, reflecting the fact that ABCP remains both an important source of funding for banks and their clients and a core product for investors," says Masako Oshima, Moody's credit officer. However, she warns that the sector continues to face certain challenges, particularly in sponsors' ability to meet investor demand regarding maturities.

Although Moody's rated ABCP issuance levels declined steadily during the credit crisis from US$488.4bn at year-end 2006, total issuance has stabilised during 2010 and stood at US$183bn as at August 2010. Oshima notes that the increasing shift to fully-supported structures has highlighted the link between the ratings of ABCP programmes and the ratings of supporting banks.

Moody's vp Oscar Heemskerk says that the phasing-out of bank support schemes across Europe will put debt ratings under pressure. "The strengthening of unsupported ratings is crucial to avoid long-term rating downgrade pressure."

A panel of senior representatives from European conduit sponsors speaking at Moody's eighth annual ABCP conference were optimistic about the medium-term outlook for the ABCP market. They agreed that the attractiveness of other types of financing is a key determinant of ABCP issuance levels, particularly in light of the new regulatory environment for banks. Panel members also commented on the importance of the US commercial paper (USCP) market for European conduits, particularly when swap rates are favourable.

Recognising this need, Denis Struc, Moody's analyst, discussed the new format of and the enhanced disclosure to be provided by the agency's new ABCP Performance Overview. "The new Performance Overview reports include an historical comparison of the programme's portfolio, an analysis of the ten largest transactions in the portfolio and qualitative analysis of key ratings drivers, written by the lead analyst for the programme," Struc explained.

The agency concluded that this greater disclosure will help investors in analysing and monitoring programme performance.

ABS

SIFMA outlines due diligence support

SIFMA has expressed its support for regulatory changes in the disclosure of repurchase requests and due diligence, as proposed by the US SEC under the Dodd-Frank Act. This, the association says, will help revive the securitisation market by enhancing transparency and rebuilding investor confidence.

Additionally, SIFMA says it is particularly supportive of proposed changes that will allow investors to make more informed investment decisions and facilitate the recovery of the securitisation markets. "Improving disclosure regarding repurchase requests and due diligence in ABS is an important step towards restoring a functioning, thriving, liquid and efficient securitisation marketplace," says Richard Dorfman, md of SIFMA's securitisation group.

In a comment letter, SIFMA outlines its support for requiring an issuer of registered ABS or a third party designated by the issuer to perform a review of the assets underlying the securitised pool. However, it recommends that a third party conducting a due diligence review should not be named an 'expert'. This is because the liability associated with that designation could limit the availability of these types of services, therefore denying the securitisation industry access to the valuable due diligence provided by firms.

Rules requiring disclosure of repurchase requests are also recommended by SIMFA. But the letter suggests that any retrospective disclosure requirement should not carry strict liability. This, the association says, is in view of the challenges that sponsors and trustees will face in gathering historic data - for which there may not have been retention and reporting policies and procedures in place.

ABS

Trade receivables ABS refinanced

Smurfit Kappa Group has completed a €250m five-year trade receivables securitisation programme. Proceeds will be used to refinance the Group's existing €210m securitisation programme, which has a September 2011 maturity, and to repay a portion of its bank debt when fully drawn.

ABS

Regulatory data service launched

S&P's Valuation & Risk Strategies group has launched a regulatory data solution for banks and insurers. The offering is designed to help banks comply with new standards for identifying and reporting securitised assets, while addressing requirements under Pillars One and Three of Basel 3.

Pillar I sets out requirements for the calculation of risk-weighted exposure amounts for securitisation positions recorded in trading books and on balance sheets, while Pillar III sets out the disclosure requirements around these assets. Implementation of the Basel 3 regulations is governed by a number of distinct directives, such as the FSA's BIPRU 9 for UK standardised, F-IRB and A-IRB banks or IFRS 9 for accounting principles.

"We have been working with a number of UK and European institutions to help them comply with these new directives, aimed at improving transparency in the structured finance market," says James Ingram, S&P director of structured solutions. "Given the particular depth and quality of relevant data around securitised assets within Global Data Solutions, we are a natural partner to help many of these institutions meet the new requirements."

ABS

Shipping methodology updated

Moody's has published an updated global shipping rating methodology, following a review of the methodology that it uses to rate and monitor ABS transactions backed by shipping loans. The review was initially prompted by the recent high volatility observed in the shipping market.

Moody's says it has gathered additional data on the industry over the last several years and used it to update its credit opinion. The update of the shipping loan ABS methodology includes a suite of individual models, which use Monte Carlo techniques to simulate the specific characteristics of shipping loan portfolios.

The rating agency notes that both quantitative and qualitative factors will form part of the rating committee decision process for shipping transactions. Such factors include the transaction type (cash or synthetic), structural protections, the legal environment, asset-specific protections such as insurance coverage, specific documentation issues and additional information about advance rates.

Due to the relatively high volatility of various aspects of the shipping market, such as charter rates and shipping vessel values, as well as the low credit quality of many ship charterers, the maximum rating that Moody's would assign to a typical shipping loan-backed transaction would be in the low investment grade territory (Baa).

ABS

Further improvement for US credit cards

US credit card charge-offs fell by 11bp in October to end the month at 8.79%, according to Moody's latest credit card indices report, with the delinquency rate also falling by 14bp. At the same time, the agency has announced it is revising its credit card ABS outlook up to stable.

The charge-off rate is now more than 12% below its level from a year ago, which was 10.04%. The continuing improvement follows a similar trend in the delinquency rate, which fell to 4.51% to mark the twelfth consecutive month of decreasing delinquencies. The delinquency rate is now almost 30% lower than its all-time peak reached in March 2009.

"Delinquencies provide a clear indication that charge-offs have plenty of momentum for further declines at least into the spring of 2011," says Jeffrey Hibbs, Moody's avp. "Accordingly, we ascribe increasing confidence in our standing base case expectation for the charge-off rate to move steadily lower into 2011."

The early-stage delinquency rate, for loans 30-59 days past due, was 1.19% - its lowest monthly level since June 2007. The payment rate index slid from 19.57% in September to 19.25% in October, while the monthly yield index also decreased for the second consecutive month, slipping to 21.66%.

The agency is changing its outlook for US credit card ABS from negative to stable as the sector continues to recover from historically poor collateral performance amid a challenging and uncertain regulatory environment. The stabilisation of performance drivers, such as unemployment, has been an important factor in this improvement.

Despite the positives, Moody's warns the risk of a double-dip recession remains, while persistent regulatory uncertainty could lead to the loss of systemic support for some of the main card issuers.

ABS

Certain sectors holding APAC back

Fitch says over 80% of structured finance ratings in the Asia-Pacific region have a stable outlook, although a few specific sectors still have negative outlooks on ratings. Negative ratings are largely concentrated in Japan, Australia and New Zealand.

Downgrades in Asia-Pacific SF during 3Q10 were the highest since 4Q09, according to Fitch, as further declines in Japanese commercial real estate values resulted in 28 downgrades during the quarter. Alison Ho, Fitch's APAC SF senior director and head of performance analytics, explains: "The economic environment for CMBS in Japan and Australia continues to be a cause for concern, as evidenced by the high percentage of negative outlooks in that asset class in those regions."

Around three-quarters of outlooks on Fitch-rated Japanese SF ratings are stable, with the remaining outlooks negative. Property values in Japanese commercial real estate remain under stress and rents in certain sectors have continued to fall.

However, there are signs that liquidity is returning, with 165 properties sold in the first nine months of the year, compared to 122 in the whole of 2009. The agency also believes the default rate for underlying loans has peaked.

Fitch says that two tranches of Japanese CMBS transactions have a positive outlook, as all loans backing them have defaulted and all proceeds are now being applied sequentially. Nearly one-quarter of all Fitch-rated Japanese SF ratings do not have outlooks assigned as they are currently rated triple-C or below.

Around 80% of Fitch-rated SF tranches backed by assets in Australia and New Zealand have stable outlooks, meanwhile, with the bulk of the remainder consisting of junior classes from Australian prime RMBS on negative outlooks. A number of non-conforming RMBS in both Australia and New Zealand also carry negative outlooks due to the weakness in the New Zealand economy and expected increased stress due to potential interest rate increases in Australia, says the agency.

All tranches in one Australian CMBS remain on negative outlook due to persistent concerns about the ability of loans maturing in December 2010 to refinance on schedule, rather than the performance of the underlying properties.

Meanwhile, three-quarters of tranches of CDOs backed by Asian assets have stable outlooks, while one is positive and the rest negative. Fitch notes that less than half of the CDOs rated in the region have outlooks assigned, due to the low ratings of the majority of synthetic arbitrage CDOs that reference global assets.

ABS

Chinese auto lease programme launched

AutoChina International has begun securitising a portion of its commercial vehicle leases through a landmark partnership with CITIC Trust. This programme is believed to be the first of its kind in China.

"Not only does it provide us with another source of financing, it also better matches funding to the actual times when the leases are originated," says AutoChina chairman and ceo Yong Hui Li.

Each month, up to CNY60m of AutoChina's commercial truck leases will be securitised and sold to investors through CITIC - with the maximum amount expected to increase over time. The resulting investment products will have a one-year maturity and pay interest at rates currently higher than standard Chinese savings account rates.

AutoChina will incur a cost of approximately 9% per annum under this programme. In addition, the firm will continue to own the vehicles that are the subject of such transactions and will be responsible for servicing the existing retail leases.

The new offerings will be rated by CCXI, China's nationwide domestic credit rating agency.

ABS

Call for tailored risk retention

In a series of letters submitted this week to joint regulators charged with implementing risk retention requirements for ABS under the Dodd-Frank Act, the American Securitization Forum voiced its support for retention requirements that are tailored to each major asset class and provide flexibility for the long term.

The ASF indicated that a 'horizontal slice', in which an issuer retains a portion of the first loss tranche, would be most appropriate for auto and student loan ABS and that a 'seller's interest' - through which an issuer retains a proportional share in the assets of a master trust - would be preferred for credit cards. For RMBS, the ASF indicated in a 12 November letter that a 'vertical slice' would be the best option - mainly because it would permit an off-balance sheet transaction even if the issuer and servicer were affiliates, a result that is not possible when a horizontal slice is retained.

"It is imperative that the risk retention rules take into account the nature and characteristics of the assets and the differing securitisation structures," says Tom Deutsch, executive director of the ASF. "This is critically important for banks and non-banks alike. For banks engaging in residential mortgage securitisations, achieving an off-balance sheet transaction is critical to extending affordable credit given risk-based capital considerations. For non-bank issuers of consumer ABS, appropriate retention requirements are especially important because, without a deposit base, these issuers rely on securitisation as their primary source of funding."

The letters also detail the association's views on appropriate exemptions to the risk retention requirements, including the qualified residential mortgage (QRM), which is required under the Act and would exempt qualifying RMBS from the rules. In addition, the ASF has put forward exemption for certain federally guaranteed student loans and ABCP.

ABS

SEC 'no action' letter extended indefinitely

The US SEC says it "has determined to extend" indefinitely its 'no-action' letter to omit credit ratings from registration statements filed under Regulation AB, which provided a six-month reprieve from the repeal of Rule 436(g) of the Securities Act under Dodd-Frank in July (see SCI issue 195).

ABS analysts at RBS note that this development proactively removes an element of uncertainty from the securitisation markets and, they believe, should be viewed as a positive affirmation of the importance of the sector. "Although new regulatory challenges still remain for issuers, the SEC has eliminated an otherwise intractable obstacle to new issuance," they comment.

ABS

Modest rise for timeshare ABS delinquencies

US timeshare ABS delinquencies have risen slightly over the last quarter, yet remain lower than a year ago, according to Fitch's latest indices for the sector. Given the expected stable collateral performance and ample credit enhancement levels, the agency says its rating outlook for timeshare ABS remains stable.

"Seasonal performance deterioration appears to have taken hold as we enter the winter months," says Fitch director Brad Sohl. "Nonetheless, year-over-year improvements remain intact and will continue so for the foreseeable future."

Total delinquencies for 3Q10 were 3.68%, up from 3.61% at the end of 2Q10. Delinquencies decreased by more than 20% from 4.64% in 3Q09.

Meanwhile, monthly defaults increased to 63% in June 2010, down from 71% at the end of 2Q10. On an annualised basis defaults were 8.75% in March - down from the 9.07% observed in 2Q10.

The annual default rate has dropped steadily after hitting its all-time peak of 9.57% in January of this year. However, as default activity typically lags delinquencies, Fitch says it expects defaults to increase in the coming months.

CDO

Trups CDO defaults, deferrals rising

Defaults and deferrals in US bank Trups CDOs continue to rise, albeit at a slower pace, according to the latest default and deferral index results for the sector from Fitch. The index increased by 0.5% in October, compared to 1.7% in the previous month.

"While the number of new deferrals is still lower compared to 2009, month-over-month deferral rates remain volatile," says Fitch director Alina Pak.

The agency reports 155 deferrals through the end of October, compared to 233 through the same period last year. Five new bank issuers defaulted in October, adversely affecting 11 CDOs and bringing the total number of defaulted bank issuers to 145 - representing US$5.4bn across 82 Trups CDOs.

Additionally, 387 bank issuers have deferred on their interest payments, affecting US$7.2bn of collateral held by 86 Trups CDOs.

CDS

EMEA succession event mulled

ISDA's EMEA Determinations Committee is deliberating over whether a succession event occurred with respect to Brisa Finance. The firm is currently undergoing a corporate reorganisation process that will see it renamed as Brisa - Concessão Rodoviária.

CDS

Further security-based swap rules proposed

The US SEC has proposed new rules about how security-based swap transactions should be reported and publicly disseminated. At the same time, security-based swap data repositories (SDRs) will be required to register with the regulator.

The proposals aim to increase accountability and transparency in the security-based swap market and ensure that repositories retain and maintain complete records of such transactions that can be accessed by regulators. "The need for these repositories stems from the opaque nature of the swaps market - a market where transaction-level data has not been widely available or required to be recorded," says SEC chairman Mary Schapiro. "These repositories have a crucial role to play in the development of a healthy and robust security-based swap market."

According to the SEC, the move represents an important step in its continuing efforts to increase the transparency of the security-based swap market and fulfil mandates under the Dodd-Frank Act. "This proposal lays out who must do security-based swap reporting, what information must be reported, and where and when it must be reported," adds Schapiro. "These rules would provide for post-trade transparency in the security-based swap markets and are designed to provide all market participants access to transaction information at the same time."

The proposed rules, known as Regulation SBSR, specify the categories of information to be reported to a repository in real time and publicly disseminated, as well as certain additional categories of information to be reported to a repository for regulatory purposes, but not publicly disseminated. They also identify which counterparty to a security-based swap transaction would be required to report information to a repository.

Additionally, to facilitate the reporting and dissemination of the information, the rules require that registered SDRs establish and maintain policies and procedures regarding security-based swap transaction data that would be reported and disseminated.

With respect to block trades, the Commission will propose and solicit comment on general criteria that would be used to determine block trade thresholds, without proposing actual thresholds at this time. In the meantime, it is seeking public comment on the proposed rules for a period of 45 days following their publication in the Federal Register.

CDS

Theta ratings affirmed, withdrawn

S&P has affirmed its triple-B minus issue credit ratings on Theta Corp's US and European class 1 MTNs and its A-3 issue credit ratings on its US and European CP. At the same time, the agency has removed the ratings from credit watch with negative implications, where they were placed on 13 October 2009. It subsequently withdrew its ratings on the MTNs and CP.

Theta Corp is a limited-purpose operating company that sells credit protection primarily on single name corporate reference obligations in the form of CDS and holds capital investments primarily in financial institution and structured finance assets. Theta currently has no outstanding class 1 MTNs and CP, and because the company is in a restricted operating mode it cannot issue new class 1 MTNs or CP.

The rating affirmations and credit watch resolutions reflect S&P's view of the estimated loss on Theta's single name corporate CDS portfolio and its capital investments. However, as of 18 November, Theta had not incorporated the agency's updated corporate CDO criteria into its capital model and so its ratings were withdrawn.

CDS

Asian succession event mulled

ISDA's Japan Determinations Committee is considering whether a succession event occurred with respect to Aioi Insurance. Aioi Insurance and Nissay Dowa Insurance last month merged to become Aioi Nissay Dowa Insurance.

CDS

Restructuring credit event mulled

ISDA's EMEA Determinations Committee is mulling whether a restructuring credit event occurred with respect to Anglo Irish Bank Corporation. On 21 October the bank announced an invitation to all eligible holders of certain securities to offer to exchange their notes for new euro-denominated floating rate notes due 2011.

CDS

Clearing waiver mooted for certain derivatives

The waiver of mandatory clearing requirements of the Dodd-Frank Act for certain OTC derivatives transactions would reduce risk in the financial system and help to achieve the risk-reduction goals of the Act, according to ISDA. The association believes that the CFTC and the SEC should grant such waivers in limited circumstances where bilateral and/or systemic risk would be reduced.

A swap that is required to be cleared may hedge the market and counterparty risk of a swap that is not able or required to be cleared, ISDA says. In such circumstances, managing both transactions on a bilateral basis reduces risk. The alternative - clearing one swap through a CCP and managing the other on a bilateral basis - increases risk between the two counterparties.

Conrad Voldstad, ISDA ceo, says: "This specific provision of the Act has unintended consequences that could be damaging to the marketplace and the level of risk in the marketplace. We believe the CFTC and SEC should exercise flexibility in interpreting the Act through rulemaking to achieve its objectives."

ISDA suggests that the Commissions could put in place reporting requirements and waiver limits to ensure the use of the waivers is not designed to avoid clearing.

CLOs

US CLOs on review for upgrade

Moody's has placed the ratings of 225 tranches from 103 US CLOs under review for possible upgrade. The rating actions consider the positive implications of improvement in certain deal collateral quality metrics since the time of the previous rating actions, including WARF, OC levels and/or exposure to defaulted and Caa-rated assets.

Moody's also took into account the improving fundamental corporate credit outlook, structural features and other deal characteristics in the consideration of these actions. The agency says it recognises that improved credit performance of the underlying collateral and favourable market conditions have had and will continue to have positive impact on CLOs.

In many transactions Moody's observed successful reinvestment of principal repayments and sale proceeds into substitute assets with below-par purchase price and/or higher ratings. The CLOs also typically benefited from a reduction in par value haircuts due to a decrease in exposure to defaulted securities and/or Caa-rated securities. Furthermore, some CLOs that have ended their reinvestment periods improved the subordination of the rated notes due to substantial amortisations of senior notes, driven by accelerated loan prepayments since the last rating actions.

Moody's notes that the rating actions affect a significant number of junior notes because they have: adequate OC coverage; either never deferred interest or have resumed paying interest; sufficient OC test cushions; or a turbo amortisation feature that enables them to delever ahead of more senior notes under certain conditions.

Full analysis of all affected deals is expected to be completed within 90 days.

CMBS

Canary Wharf asset substitution welcomed

Fitch says that there is no impact on Canary Wharf Finance II's ratings from the substitution of assets completed on 17 November 2010 by the Canary Wharf Group. The substitution entailed the removal from the portfolio of two properties - 25 Bank Street and 40 Bank Street - and the inclusion of 10 and 20 Cabot Square.

The total value of the incoming assets at £615m is greater than that of the outgoing ones (£493m), based on a June 2010 valuation. This has resulted in an aggregate market value for the bond collateral of £3.065bn and a reported LTV ratio of 80.3%.

Since Lehman's insolvency in 2008, 40 Bank Street has carried significant physical vacancy and would in all probability have shortly led to the AIG cash deposit being drawn for the first time, according to Fitch. Its replacement removes the risk that the site would not have been re-let within the four-year term of the deposit and also avoids anticipated costs of any refurbishment being paid as a transaction cost.

Both of the new assets, which Fitch considers to be of grade A quality, are 100% occupied by Barclays Bank on leases that expire in 2032. However, £65.7m has had to be deposited in an issuer account to cover the shortfall in rental income, given the level of rent payable under the Barclays leases, as well as some additional costs.

Following the substitution, debt service coverage stands at 1.0x, while the weighted-average term to the earlier of lease break or expiry is 16.9 years, compared with 12.7 years before the substitution.

CMBS

CMBS borrower SPE criteria outlined

S&P has clarified its methodology and assumptions for assessing borrower-level SPEs in US CMBS pools. Organising borrowers as SPEs in CMBS pool transactions helps focus the rating analysis on the credit risk of loans, the agency says.

Further, the organisation of the borrower as an SPE helps reduce the risk of insolvency as a result of activities unrelated to owning the property. Additionally, borrowers are less likely to become insolvent as a result of incurring debt or liabilities other than the mortgage loan being deposited into the CMBS pool, the agency states.

CMBS

Rule 17g-5 brings unintended consequences

Restrictions in dialogue between US CMBS special servicers and credit rating agencies brought about by SEC Rule 17g-5 may have the unintended consequence of producing unnecessary rating volatility, according to Fitch.

The agency reports that some issuers have interpreted 17g-5 to extend to the interaction that the servicer may have on an ongoing basis with the hired rating agencies in their efforts to monitor the performance of the transaction and maintain its ratings. Consequently, certain CMBS have begun to include language into newly issued pooling and servicing agreements (PSAs) that attempt to dictate how special servicers communicate with credit rating agencies (CRAs).

"A special servicer's compliance with the provisions of 17g-5 should not be interpreted in a way that impacts the quantity, quality or timeliness of the information that a servicer shares with Fitch in the course of Fitch's transaction surveillance process," says Huxley Somerville, group md and head of US CMBS for Fitch.

The agency considers dialogue with servicers an important part of its CMBS surveillance process because the delinquency, default and resolution of large assets can have a significant impact on the direction of ratings. Further, investors value this type dialogue between rating agencies and servicers.

"Language that restricts the servicer's ability to directly communicate with a hired rating agency is problematic and has the potential to not only add extensive delays to response time, but will likely limit the quality and completeness of the servicer's responses," says Fitch md Stephanie Petosa.

CMBS

Fixed rate CMBS option offered

Berkadia Commercial Mortgage has added a new fixed-rate loans option for inclusion in the new generation of CMBS. Offered through its nationwide mortgage banking network, the firm says the product will provide clients with access to capital and is expected to be available at the beginning of 2011.

Berkadia svp Joseph Franzetti will manage the fixed-rate loan origination programme. Franzetti, formerly with Cohen Financial, joined the firm earlier this year to establish and manage relationships with capital markets lenders.

An additional option under development, the firm says, is a short-term floating-rate loan programme to provide interim financing to select multifamily borrowers with pending Fannie Mae or Freddie Mac executions. The bridge loan programme will be managed by Berkadia's agency lending group under the leadership of evp John Cannon.

CMBS

Pair of Titan loans restructured

Hatfield Philips has restructured two loans that make up part of the Titan Europe 2006-2 CMBS portfolio. The €273.4m Margaux portfolio loan is secured on 526,586 square metres of predominantly residential properties across Germany, while the €208m Petrus portfolio loan is secured on 346,723 square metres of residential properties in Berlin Hellersdorf.

Since the transfer of the two loans to special servicing, Hatfield Philips negotiated loan restructuring terms with the borrower. For the Margaux loan, the final maturity date has been extended until 18 July 2012, while the Petrus loan has had its final maturity date extended to 18 April 2012 with the borrower required to fund a monthly capex top-up. Both loans have the option to extend to 18 January 2013, so long as certain conditions are met.

The restructuring agreement includes: a new hedge at the borrower's cost; all surplus cash after opex payments to be invested in the properties; a letter of credit issued by the borrower that will remain in force until the final extended maturity of the loan; and all other pre-restructure covenants remaining in force.

Michelet Romulus, asset manager at Hatfield Philips, comments: "In the current, very challenging, market we are pleased to announce the successful completion of the restructuring of the loan. As special servicers, it is our responsibility to ensure maximum value is obtained for the borrower and this restructuring illustrates the creative approach that is essential with the current lack of available finance."

Real Estate

Gain seen in US CRE prices

The latest Moody's REAL Commercial Property Price Indices (CPPI) indicate that US CRE prices increased by 4.3% in September - the first increase since May and the largest gain in the history of the CPPI, the agency reports.

As of the end of September, prices are up by 0.3% from a year ago, yet down 36.8% from two years ago. Prices are now 42.7% below the peak value reached in October 2007.

"Each of the summer months this year recorded declines in the 3%-4% range, followed by this month's sizeable uptick," says Moody's md Nick Levidy. "The relatively large swings seen in the index recently are due in part to the uncertain macroeconomic environment and the effects of a thin market with low transaction volumes."

In September there were 153 repeat-sale transactions. Dollar volume of the repeat-sale transactions jumped to US$3.7bn, compared to US$1.85bn in August.

Meanwhile, the national property type index showed mixed results. Two of the four major property types recorded gains in the third quarter and two showed declines.

Retail saw a 5.7% rise in the quarter, with apartments also rising by 0.4%. Office properties saw a 3.8% decline in prices while industrial properties also dropped 4.3%.

In the top-ten MSAs, apartment prices fell by 4.2% in the first quarter, while industrial prices sank 9.9%. Retail - in the top ten MSAs - posted the best performance, with a quarterly return of 9.8%, while office prices gained 9.4%.

Moody's reports that during the third quarter, all four property types in the western region underperformed. Three of the four property types experienced negative returns, with only retail posting a positive gain.

RMBS

Vendors link in transparency drive

Equifax has linked its ABS Credit Risk Insight Direct tool to Lewtan's ABSNet Loan database of residential deal and mortgage performance data. The collaboration aims to bring further transparency to the analysis of MBS, while providing indicators of loan performance, such as updated credit scores, detail on all mortgage and home equity payments and owner-occupancy and performance on past mortgages.

RMBS

Low interest rates boost UK NC RMBS

The low interest rate environment and its impact on borrower affordability have contributed significantly to the positive rating actions on UK non-conforming RMBS, according to Fitch.

Fitch's ratings index for loans in arrears - for three months or over - showed a 5.3% decline to 17.7% in 3Q10, from 18.7% in 2Q10. The index for current outstanding repossessions has also declined by 8.3% to 0.9% from 1% in Q210. Although this trend is expected to continue in the near future, given the low period repossessions reported, current outstanding repossessions are expected to flatten and remain stable over the coming quarters, the agency says.

Limited losses realised during the quarter have helped transactions continue to top up their once heavily utilised reserve funds towards their target levels. 33 transactions currently have reserve funds below their target levels and only five remain fully utilised with decreasing balances on their principal deficiency ledgers.

Of the 103 Fitch-rated UK non-conforming RMBS transactions, 94 are amortising sequentially. Nine will continue to amortise sequentially and will never revert to a pro rata pay-down, due to their performance trigger set on cumulative net losses, the agency concludes.

RMBS

Negative outlooks for Irish MBS

Fitch has revised the outlooks on 13 Irish RMBS tranches and one Irish CMBS tranche to negative from stable. All tranches of the 10 affected Irish transactions have either a negative outlook or are on rating watch negative. This, the agency says, is a result of heightened concerns over the future performance of the Irish mortgage markets.

The effect of the macroeconomic situation on performance drivers of RMBS and CMBS transactions - such as unemployment and property values - remains uncertain. With both residential and commercial property values declining, the proportion of borrowers in arrears by three or more months in Irish RMBS also continues to deteriorate. This reached 4.1% for Fitch-rated transactions in 3Q10.

Fitch concludes that its current Irish sovereign rating is single-A plus, with a negative outlook.